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Third Quarter Fiscal 2010 and Nine Months Fiscal 2010 Summary (in millionsof U.S. Dollars, except per share data)
"Winner Medical delivered solid third-quarter operating results under theshadow of the European debt crisis and an increased in raw material prices.Our operating numbers were benefited from accelerating growth in the North andSouth American and European markets, as well as a continuing increase in salesfor PurCotton(R) products," said Jianquan Li, Chairman and Chief ExecutiveOfficer of Winner Medical. "Our PurCotton business is performing well. Inaddition to opening several new retail stores, we are in the initial phase oflaunching Business-to-Customer online shopping platform to complement ourbrick-and-mortar business. We continue to add talents across all aspects ofthe business, including store management, brand building, and e-commerce.These investments position our PurCotton business for robust long-term top andbottom line growth."
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"Looking forward, we will continue to reshape and strengthen our portfolio,by maintaining good relationships with existing large foreign clients, such asCardinal Health Inc. and Covidien Plc., and expand our distribution networkfor our medical products sales in China through distributors and direct tohospitals, as a result of China's medical reform, while accelerating sales ofPurCotton(R) brand products through retail sales in our chain stores andsupermarkets, on-line sales and wholesale distribution sales to largecustomers. As more consumers around the world buy more products that betterprotect their health and the environment, our PurCotton(R) products are wellpositioned to meet their needs. We expect to fund these key strategicinvestments through our strong cash flows," Mr. Li said.
Third Quarter FY2010 Highlights
Net Sales
Winner Medical reported net sales of $30.9 million for the third quarterof 2010, a 27.0% increase from $24.4 million in the third quarter of 2009.This increase was mainly driven by increased sales orders from North and SouthAmerican and European customers, as well as increased PurCotton(R) productssales. Net sales to North and South American customers increased approximately58.1% to $7.2 million in the third quarter of 2010, from $4.6 million in thethird quarter of 2009, as a result of more orders from existing customers,such as Cardinal Health Inc. and Covidien Plc. The net sales to customers inEurope were $12.4 million in the third quarter of 2010, an increase of 27.2%,compared to $9.8 million during the same period last year. PurCotton(R)products sales increased approximately 114.0% to $2.6 million in the thirdquarter of 2010 from $1.2 million in the third quarter of 2009.
Gross Profit
Gross profit in the third quarter of 2010 increased 24.4% to $8.9 millionfrom $7.2 million in the third quarter of 2009. Third quarter 2010 grossmargin was 28.9%, compared to 29.5% in the third quarter of 2009. The slightdecline in gross margin resulted from an increase in the price of cotton, ourprincipal raw material. In order to reduce this risk, we have increased ourselling price progressively, which was accepted by our customers.
Selling, General and Administrative Expenses
In the third quarter of 2010, selling, general and administrative expenseswere $5.3 million, versus $3.6 million in the third quarter of 2009. Adjustedselling, general and administrative expenses (non-GAAP), which excludeshare-based compensation expenses, for the third quarter were $5.5 million,versus $3.7 million for the same quarter of 2009. This increase was mainly dueto increases in transportation expenses, growth in salaries to support highersales growth, as well as an increase in leasing fees for PurCotton(R) stores.
Income from Operations
Income from operations decreased by 2.1% to $3.6 million in the thirdquarter of 2010, from $3.7 million in the third quarter of 2009. Adjustedincome from operations (non-GAAP), which excludes share-based compensationexpenses, was $3.9 million in the third quarter of 2010, compared to $3.8million in the same period of 2009.
Income Taxes
The Company's effective tax rate for the third quarter of 2010 was 9.3%,compared to 18.5% in the third quarter of 2009. The lower income tax rate wasmainly due to the Company's subsidiary, Winner Industries (Shenzhen),obtaining a High and New Technology Enterprise Certificate, which reduced itsincome tax rate from 18% to 15%, as well as the Company's Research andDevelopment expenses enjoying a 150% tax deductible preferential policy duringthe third quarter of 2010 compared with a lower deduction during the samequarter of 2009.
Net Income Attributable to Winner Medical Group Inc.
Net income attributable to Winner Medical Group Inc. increased by 10.1% to$3.4 million in the third quarter of 2010, as compared to approximately $3.1million in the third quarter of 2009. Diluted earnings per share remainedunchanged compared to the third quarter of 2009 at $0.14. Adjusted net incomeattributable to Winner Medical Group Inc. (non-GAAP), which excludes share-based compensation expenses, was $3.6 million for the third quarter of 2010,an increase of 14.0% from the same period a year ago. Excluding share-basedcompensation expenses, adjusted diluted earnings per share (non-GAAP) was$0.15 in the third quarter, versus $0.14 per share in the comparable quarterof 2009. This increase was primarily driven by rising cotton price andmaritime transportation expenses. In response, the Company is increasing itsselling prices to its customers to pass along these cost increases. However,there is some time lag for these increases to be passed on to consumers andreflected in the Company's net income.
Nine Months Ended June 30, 2010 Highlights
Net Sales
Winner Medical reported net sales of $86.8 million for the nine monthsended June 30, 2010, a 22.7% increase from $70.7 million for the same periodof 2009. This increase is mainly attributable to growing product demand fromChinese customers, increased sales orders from existing North and SouthAmerican customers, as well as a rapid increase in PurCotton(R) products salesto customers in China.
Gross Profit
Gross profit for the nine months ended June 30, 2010 increased to $25.7million, a 31.3% increase from $19.6 million for the same period of 2009.Gross margin was 29.6% for the nine months ended June 30, 2010, compared to27.7% for the nine months ended June 30, 2009, which resulted from theCompany's strategy of targeting the Chinese medical market combined withhigh-margin sales of PurCotton(R) products, as well as benefits derived fromour lean production management.
Selling, General and Administrative Expenses
For the nine months ended June 30, 2010, selling, general andadministrative expenses were $14.7 million, versus $11.9 million for the sameperiod of 2009. Adjusted selling, general and administrative expenses (non-GAAP), which exclude share-based compensation expenses, for the nine monthsended June 30, 2010 were $15.5 million, versus $12.2 million for the sameperiod of 2009. This increase was primarily driven by increases intransportation expenses for the domestic and export markets, increases insalaries for management and administrative staff and consulting expenses forbrand-building projects, as well as an increase in leasing fees resulting fromthe launching of PurCotton(R) products.
Income from Operations
Income from operations increased by 50.4% to $11.4 million for the ninemonths ended June 30, 2010, from $7.6 million for the same period of 2009.Adjusted income from operations (non-GAAP), which excludes share-basedcompensation expenses, was $12.2 million for the nine months ended June 30,2010, compared to $7.9 million for the same period of 2009.
Income Taxes
The Company's effective tax rate for the nine months ended June 30, 2010was 13.5%, compared to 18.8% for the same period last year for the reasonsdiscussed previously.
Net Income Attributable to Winner Medical Group Inc.
Net income attributable to Winner Medical Group Inc. increased by 26.3% to$10.0 million for the nine months ended June 30, 2010, as compared toapproximately $6.2 million for the same period of 2009. Diluted earnings pershare increased by 53.6% to $0.43 for the nine months ended June 30, 2010,versus $0.28 per share for the comparable period last year. Adjusted netincome attributable to Winner Medical Group Inc. (non-GAAP), which excludesshare-based compensation expenses, was $10.8 million for the nine months endedJune 30, 2010, an increase of 65.8% from the same period of 2009. Excludingshare-based compensation expenses, adjusted diluted earnings per share(non-GAAP) was $0.47 for the nine months ended June 30, 2010, versus $0.29 pershare for the comparable period last year, an increase of 62.1%. This increasewas primarily driven by high demand for PurCotton(R) products, rapidlyincreasing sales of our more traditional medical offerings to Chinesecustomers and lean production management.
Other Selected Financial Data
Average accounts receivable days outstanding were 43 days as of June 30,2010 compared to 45 days as of September 30, 2009.
As of June 30, 2010, the Company had $12.7 million in cash and cashequivalents, compared to $9.5 million as of September 30, 2009. Net cashprovided by operating activities and net cash used in investing activitiesduring the nine months ended June 30, 2010 were $5.6 million and $5.2 million,respectively. Working capital as of June 30, 2010 was $41.1 million comparedto $23.0 million as of September 30, 2009.
Operational Highlights Year to Date
PurCotton(R) Business Update
PurCotton(R) product sales of $7.0 million for the nine months ended June30, 2010 represented a 121.7% increase versus the $3.2 million of sales forthe same period of 2009. Sales growth benefited from an increase in sales fromPurCotton(R) chain stores and PurCotton(R) jumbo rolls to customers in Chinaand Japan that produce consumer products, including sanitary and incontinenceproducts, as well as from the processing of orders for PurCotton(R) finishedmedical products, such as operating room towels and sponges, for customers inChina, Europe and the United States.
As of August 11, 2010, the Company owned and operated 17 PurCotton(R)chain stores in Shenzhen, Guangdong Province. Each store contains four typesof PurCotton(R) branded personal products and healthcare supplies, whichinclude PurCotton(R) baby personal products, feminine personal products, dailyhome care products and medical care products. The main distribution channelsfor these products include chain stores (PurCotton(R) stores), on-line sales,supermarkets and wholesale to large customers. PurCotton(R) stores are mainlylocated in downtown shopping malls. The projected average total cost of eachstore, with sizes ranging from 50 to 200 square meters, is approximately$40,000 to $60,000, which includes the lease, deposit, build out, instruments,inventory stocking and one month's salary for salespersons. The Company isslowing down the pace of chain stores opening because management has beenoperating the PurCotton's consumer business for less than one year. In orderto build a healthy and sustainable retail business, the Company is carefullyevaluating all relevant operating and financial metrics, including storelocation and size, product packaging and pricing, brand image, customerservice and marketing. We will provide ongoing updates related to theperformance of our PurCotton(R) stores on a regular basis so investors canbetter understand and evaluate our progress.
Recently, the Company opened its first online PurCotton(R) store featuringits entire array of products on Taobao.com, the largest online tradingplatform in China. This is the Company's first initiative to establishPurCotton Business-to-Consumer (B2C) online stores in order to address theconsumers' evolving shopping preferences. The Company is also planning tobuild its own B2C trading website that will be co-branded through its retailstores, in addition to other online mediums to reach a much broader customerbase throughout China. We expect our collective B2C efforts to provideincremental sales to new and existing customers and help drive significantgrowth in the overall PurCotton(R) franchise.
As of 11 August, the first two PurCotton(R) manufacturing lines areproducing at full capacity, with a total production capacity of 200 tons permonth. The third production line commenced production in March 2010 and thefourth production line is expected to commence operation before December 2010.
Conference Call
Winner Medical's senior management will host a conference call to discussits third quarter fiscal year 2010 results and recent business developments.
A telephone replay will be available shortly after the conclusion of thecall and will be accessible through August 18, 2010 by calling +1-888-286-8010(US) or +1-617-801-6888 (International); Pass code: 76980551.
About Winner Medical:
Winner Medical is a leading manufacturer and the largest exporter byvolume in the medical dressing industry in China. Headquartered in Shenzhen,the Company has eight wholly owned operating subsidiaries and four jointventures with over 5,000 employees. The Company engages in the manufacturing,sale, research and development of medical care products, wound care products,home care products and PurCotton(R) products, a non-woven fabric made from100% natural cotton. The products are sold worldwide, with Europe, the UnitedStates, China and Japan serving as the top four markets. The Company currentlyholds more than sixty patents and patent applications for various products andmanufacturing processes and is one of the few Chinese companies licensed bythe U.S. Food and Drug Administration (FDA) to ship finished, sterilizedproducts directly to the United States market. To learn more about WinnerMedical, please visit Winner Medical's web site at:http://ir.winnermedical.com
Forward-Looking Statements
This press release contains certain statements that may include"forward-looking statements" within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. All statements, other than statements of historicalfact included herein, are "forward-looking statements" including statementsregarding Winner Medical and its subsidiary companies' business strategy,plans and objectives and statements of non-historical information. Theseforward-looking statements are often identified by the use of forward-lookingterminology such as "believes," "expects" or similar expressions and involveknown and unknown risks and uncertainties. Although Winner Medical believesthat the expectations reflected in these forward-looking statements arereasonable, they do involve assumptions, risks and uncertainties, and theseexpectations may prove to be incorrect. You should not place undue reliance onthese forward-looking statements, which speak only as of the date of thispress release. Winner Medical's actual results could differ materially fromthose anticipated in these forward-looking statements as a result of a varietyof factors, including those discussed in Winner Medical's periodic reportsthat are filed with and available from the Securities and Exchange Commission.All forward-looking statements attributable to Winner Medical or personsacting on its behalf are expressly qualified in their entirety by thesefactors. Other than as required under the securities laws, Winner Medical doesnot assume a duty to update these forward-looking statements.
Non-GAAP Financial Measures
To supplement Winner Medical's consolidated financial results presented inaccordance with U.S. GAAP, Winner Medical uses the following non-GAAP measures:adjusted net income attributable to Winner Medical Group Inc., adjustedearnings per share, adjusted income from operations and adjusted selling,general and administrative expenses. These measures represent net incomeattributable to Winner Medical Group Inc., earnings per share, income fromoperations and selling, general and administrative expenses, respectively, asadjusted to exclude share-based compensation expense.
Winner Medical believes that, in conjunction with GAAP financial measures,these non-GAAP measures provide meaningful supplemental information regardingits performance and liquidity and both management and investors benefit fromreferring to these non-GAAP measures in assessing the Company's performanceand when planning and forecasting future periods. The calculation of thesenon-GAAP measures allows the Company to compare its operating results withthose of other companies without giving effect to expenses related to share-based compensation, which may vary for different companies for reasonsunrelated to the overall operating performance of a company's business.
These non-GAAP measures are not measures of performance under accountingprinciples generally accepted in the United States (U.S. GAAP). The Companyincludes them in this press release in order to:
These non-GAAP measures are not meant to be considered in isolation or asa substitute for items appearing on the Company's financial statementsprepared in accordance with U.S. GAAP. Rather, the non-GAAP measures should beused as a supplement to U.S. GAAP results to assist the reader in betterunderstanding the operational performance of the Company. The Companyrecognizes that the usefulness of these non-GAAP measures has certainlimitations, including:
Management compensates for these limitations by using these non-GAAPmeasures as comparative tools, together with U.S. GAAP measurements, to assistin the evaluation of its operating performance. Please refer to the non-GAAPreconciliation tables at the end of this press release for a reconciliation ofadjusted net income attributable to Winner Medical Group Inc., adjustedearnings per share, adjusted income from operations and adjusted selling,general and administrative expenses to net income attributable to WinnerMedical Group Inc., earnings per share, income from operations and selling,general and administrative expenses, respectively, which are the most directlycomparable U.S. GAAP financial measures.Q3 Q3 9 Months 9 Months FY2010 FY2009 Y/Y FY2010 FY2010 Y/Y Net Sales $30.9 $24.4 27.0% $86.8 $70.7 22.7% Cost of Sales $22.0 $17.2 28.1% $61.1 $51.1 19.4% Gross Profit $8.9 $7.2 24.4% $25.7 $19.6 31.3% Income from Operations $3.6 $3.7 -2.1% $11.4 $7.6 50.4% Net Income Attributable to Winner Medical Group Inc. $3.4 $3.1 10.1% $10.0 $6.2 61.3% Diluted EPS $0.14 $0.14 0% $0.43 $0.28 53.6%
SOURCE Winner Medical Group Inc.
